All expenses must be accounted source for, even losses, in order to make sure the trading results are accurate. No matter when or how much they were received during trading, profit and loss periods, incomes, and gains must all be recorded.

Before final accounts are prepared, it’s crucial to adjust the accounts in the mercantile bank system. It is common practice to adjust expenses prior to final accounts are prepared. Journal entries are used to make the necessary adjustments. These entries are called adjustment entries.

Modifications

Outstanding Expenses

Some expenses related to a period might not be paid within the applicable accounting period. All unpaid and outstanding expenses are those that have yet to be paid or are pending payment. All expenses incurred by this method must be reported in an accounting year in which it occurred. In other words, all expenses that were paid and those not paid must be included in an accounting period. This allows for you to see the real trading results. There will be no entry if the salaries that have not been paid for the month are not recorded in your books of accounts. In other words, the profit or loss account for salaries will be less than the actual expenses. This will result in a higher profit.

Prepaid expenses

The accounting year following the year will allow you to benefit from some expenses that you have already used. Because these expenses can be attributed in future periods, they will not appear in the final accounts. To make true profits, these prepaid expenses should be adjusted in your books of accounts. Taxes and insurance are all included. All payments must first be made and adjusted. Rent for one year is paid at 1.7.79. The tenant’s accounting year is calendar year. Six months rent will be paid unpaid, and the next year’s rent will be due.

Accrued Income

It is possible to have incomes from the past year that were not received until the end. These incomes could include interest on investments, rent, or commission. Merchants typically earn them during an accounting period but do not receive them. These income items should be adjusted before final accounting accounts are prepared. This income should then be credited to an appropriate income account. Income earned but not yet received must be treated as an asset. The amount is still possible to be received.